Ford's Latest Wrong Turn

The decision to pull back on hybrids represents a serious blunder.

Ford's (NYSE:F) latest retrenchment is under way and, unsurprisingly, it includes dramatic production cuts. While it's true that structural disadvantages vis-a-vis foreign competitors are a major reason for the company's woes, at least some of the floundering has to do with an inability to execute a coherent strategy. A couple of recently released reports suggest that Ford has again missed a long-term opportunity.

In what should be a marketing coup, the auto website Edmunds.com recently found that Ford Escape Hybrid buyers can pay off the extra sticker expense (compared to a non-hybrid Escape XLT) in less than three years, based on 15,000 miles of driving per year. This "payoff time" is far and away the shortest among hybrid vehicles with conventional counterparts. The Ford vehicle also compares favorably with Toyota's (NYSE:TM) uber-popular Prius when the Japanese car, which has no conventional counterpart, is stacked up against the gas-only Camry LE. In that comparison, which includes a federal tax credit, the Prius takes 2.1 years to break even.

At the same time, Consumer Reports recently found that fuel economy is now the top concern among vehicle buyers. The Escape Hybrid, as an affordable hybrid, certainly looks like a way to capitalize on emerging consumer trends, especially if Ford had decided to follow up with similar vehicles.

In March, it looked like Ford might embrace hybrids as a way to win back consumers. Back then, the company launched TV ads and offered low financing for the Escape Hybrid. The effect was fairly dramatic -- sales doubled in some markets and inventory disappeared. Then, in June, management backed off plans to expand hybrid production.

Instead, Ford is focusing on "flex fuel" models that can utilize high ethanol blends. Unfortunately, ethanol recently has been more expensive than gasoline. Ethanol prices are falling, but they will have to drop a lot more to save consumers cash, since cars and trucks are significantly less fuel-efficient when running on high ethanol blends than when running on gasoline.

Granted, General Motors(NYSE:GM) also has been a big ethanol booster. But unlike Ford, GM will soon introduce more hybrids thanks to a joint project with DaimlerChrysler(NYSE:DCX) and BMW. GM's new technology will improve the fuel economy of big SUVs and trucks, which are major profit centers, and could be cheaper than current hybrid systems.

Meanwhile, Ford has lost an opportunity to reduce hybrid technology costs via economies of scale. Once again, it appears to be off track.